VZCZCXRO5172
RR RUEHBC RUEHDA RUEHDH RUEHKUK
DE RUEHGB #0518/01 0590311
ZNR UUUUU ZZH
R 280311Z FEB 10
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 6860
INFO RUCNRAQ/IRAQ COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 04 BAGHDAD 000518 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA/I/ECON and SP/JCOHEN 
 
E.O.12958: N/A 
TAGS: ECPS EFIN ECON EAID IZ
SUBJECT: MOBILE BANKING - GREAT POTENTIAL IN IRAQ, BUT OBSTACLES 
REMAIN 
 
REF: FEB 3 TELCON: STATE(COHEN) - EMBASSY BAGHDAD(ECON, TREASURY) - 
USF-I (J6) - TFBSO(HAAG) 
 
SENSITIVE BUT UNCLASSIFIED.  PLEASE PROTECT ACCORDINGLY. 
 
¶1. (SBU) This cable contains substantial input from Treasury's 
Office of Technical Assistance (OTA), DoD's Task Force for Business 
and Stability Operations (TF BSO) and USF-I, J-6 (Communications and 
Information Systems Directorate). 
 
¶2. (SBU) SUMMARY: With two cell phones for every three Iraqis, it 
appears great market potential exists for "mobile banking" -- 
allowing Iraqi subscribers to use mobile phones to view account 
balances and make electronic payments and funds transfers. 
Significant impediments -- none insurmountable -- stand in the way 
of quick growth in Iraq's mobile banking sector:  a general mistrust 
of banks by the population; existing Iraqi laws and regulations; 
lack of electronic core banking systems in the state-owned banks; 
and the need to further develop the switch infrastructure.  Mobile 
phone companies and others are enthusiastic about pushing ahead with 
one model or another in the near term.  The Central Bank of Iraq 
also seems positive about the inevitability and promise of mobile 
banking, though it is wary of "mobile wallet," whereby the cell 
phone accounts themselves store value.  DOD's Task Force for 
Business Stability Operations (TF BSO) is coordinating with the 
Iraqi electronic banking consortium AMWAL and AsiaCell on a pilot 
mobile banking project for 300 of both entities' employees.  The 
other major cell phone provider in Iraq, Zain, is considering 
providing a more limited mobile phone-based money transfer service 
that would run through credit and banking institutions outside Iraq. 
 For the time being, however, the only large-scale functioning 
e-payment system used for mass distribution of salaries and pensions 
is the Iraqi government's "Smart Card," operated through two state 
banks.  (Private banks are offering smaller-scale services.)  END 
SUMMARY. 
 
¶3. (SBU) COMMENT: Getting the necessary regulatory, technical, and 
consumer protection infrastructure in place for mobile banking 
obviously will take some time.  Delays, however, could lead the 
private sector and public to find more immediate workarounds, which 
may lead to prudential and security vulnerabilities.  Once 
operational, the attractiveness of mobile banking may spur many more 
Iraqis to move their money into the formal financial system, a boon 
to economic development.  Iraq's private banks (who have a 
technological and service advantage over the state banks) may also 
stand to gain as they are better able to offer these services. 
Despite these advantages, however, growth of the private banking 
sector will be limited as long as Iraqi government entities are 
forbidden from doing business with private banks - the government 
accounts for approximately 60 percent of employment and GDP.   As 
Iraq inevitably presses ahead with some sort of mobile, electronic 
transaction mechanism, we should look to ensure that these 
developments keep with global best practices, efficient use of 
appropriate technology, and safeguards against fraud, money 
laundering and other abuses.  END COMMENT. 
 
EXCELLENT POTENTIAL MARKET FOR MOBILE BANKING IN IRAQ 
--------------------------------------------- -------- 
 
¶4. (U) With more than 19.5 million mobile phone accounts  in Iraq - 
and more people signing on every day - tremendous market potential 
exists for mobile banking here.  [NOTE: Given Iraq's population of 
approximately 30 million, this implies a penetration rate of 63 
Qapproximately 30 million, this implies a penetration rate of 63 
percent.  This likely overstates the case, however, as many 
subscribers have two or three phones from different companies to 
overcome lack of roaming and gaps in coverage.  END NOTE.]  New 
mobile banking technologies such as point-of-sale phone payments at 
retail shops, mobile phone bill payment, and electronic funds 
transfers via text would undoubtedly be very popular here.  These 
types of transactions would also allow Iraq to "leap frog" over some 
of the traditional fund transfer mechanisms (such as checks, which 
are often counterfeited here).  Moreover, this potential market is 
expected to grow with the arrival of several international oil 
companies, who have already expressed the desire to use the latest 
banking systems for their internal operations and employees, 
possibly on a large scale. 
 
¶5. (SBU) One particular advantage of mobile banking for Iraq's 
smaller, self-employed entrepreneurs is that the point-of-sale 
transaction function means that they would not have to invest in 
expensive point-of-sale credit card readers or pay hefty transaction 
fees.  Similarly, families wanting to send funds to relatives via 
bank transfers in Iraq sometimes pay exorbitant fees (up to $95 per 
transaction) to wire money domestically within the same bank, and 
the payment is often delayed.  A mobile phone transfer would likely 
take less time, at a fraction of the cost.  Next, mobile banking has 
allowed other developing countries to invest in fewer ATMs, which 
are expensive to operate.  Many merchants in other countries also 
 
BAGHDAD 00000518  002 OF 004 
 
 
offer cash back with a mobile banking purchase, which saves them the 
risk and expense of carrying their cash to the bank.  Finally, many 
Iraqis currently have only one option if they want to know their 
account balance:  wait in a long line (sometimes for hours) for a 
teller to look it up.  Mobile banking would give account holders the 
option of viewing their balance almost instantaneously. 
 
TFBSO's PILOT MOBILE BANKING PROJECT 
------------------------------------ 
 
 
¶6. (SBU) The Department of Defense's Task Force for Business 
Stability Operations (TFBSO) is already coordinating a pilot mobile 
banking project with 300 users with the AMWAL consortium of 13 (out 
of 36) Iraqi privately-owned banks and the cell phone provider, 
AsiaCell.  The project will help assess the feasibility of a larger 
mobile banking system throughout Iraq.  So far as we know, it is the 
only such project in the country. 
 
The pilot project allows participants to: 
 
- Check their account balance, 
- Top up their cell phone credit automatically, 
- Send money from one person to another electronically, and 
- Pay merchants directly from their account instead of using a debit 
card. 
 
Although the project is still relatively small, the partners plan to 
expand it over the coming year, perhaps to university students.  The 
project is also technologically simple:  no account menu is 
displayed on the phone, and users text codes into the system 
depending on the task.  AMWAL hopes that the project will move past 
its pilot stage and go "live" this spring.  [NOTE: This project in 
its current phase cannot be used as a mass-payroll system.  The 
electronic switch does not work in a way that can "push" thousands 
of payments to various accounts instantaneously.  Each payment must 
be texted individually, which could lead to errors.  The lack of a 
simple menu on the phone also demands some texting savvy on the part 
of the user.  END NOTE.] 
 
GENERAL POPULATION STILL SKEPTICAL OF BANKS 
------------------------------------------- 
 
¶7. (U) Despite the great potential of mobile banking in Iraq, much 
work lies ahead.  The general population remains severely 
under-banked; only nine percent of Iraqis have bank accounts. 
Because of cash shortages during government pay periods, robberies, 
corruption, and a lack of deposit insurance, many Iraqis do not view 
banks as a safe place to keep money.  Instead, they generally keep 
cash at home and use the traditional "hawala" money transfer system. 
 In total, Iraq has only 853 bank branches for a population of more 
than 30 million.  By comparison, to achieve the same bank 
branch-per-capita ratio of Jordan, Iraq would need more than 3,000 
branches.  In order for mobile banking to take hold on a large 
scale, more Iraqis would first have to open bank accounts and link 
them with their mobile phones.  (See comparison of "mobile banking" 
and "mobile wallet" in paragraph 11.) 
 
¶8. (U) State-owned banks, other private banks, or foreign investors 
may launch competing mobile banking projects in the future.  All of 
the private banks together still make up only a tiny fraction of 
Iraq's total banking market - three percent of total assets. 
AMWAL's consortium currently includes only four of the top ten 
privately-owned banks, so its total market share remains exceeding 
small.  Iraqis in the past have been especially skeptical of private 
banks, and it may take time before AMWAL's market share grows. 
Since state-owned banks currently make up 97 percent of the total 
banking market (by assets), helping the state banks offer mobile 
Qbanking market (by assets), helping the state banks offer mobile 
banking would help boost the total number of mobile banking 
customers in Iraq, though it also would bolster the comparative 
advantages the state banks already enjoy over private banks. 
 
GOI REGULATORY AND LEGAL HURDLES 
-------------------------------- 
 
¶9. (SBU) Iraqis' wariness about banks is only one obstacle to 
achieving broad-based mobile banking in Iraq.  Several Government of 
Iraq legal hurdles exist as well, including lack of legal validity 
for e-transactions, GOI strictures against government agencies using 
private banks, and banking regulators' resistance to cell phone 
companies performing bank-like functions.  Opening the legal 
environment for mobile banking might require new legislation passed 
by the Council of Representatives (COR), and changes to Central Bank 
of Iraq (CBI) regulations and Ministry of Finance (MOF) policies. 
Some GOI officials are very enthusiastic about mobile banking, so we 
could possibly see movement on regulatory changes in the near term. 
 
ELECTRONIC SIGNATURES NEED TO BE LEGALLY ACCEPTABLE 
 
BAGHDAD 00000518  003 OF 004 
 
 
--------------------------------------------- ------ 
 
¶10. (SBU) CBI Director for Banking Supervision Walid Eidy has told 
EmbOffs he is excited about mobile banking and would be happy to 
meet with investors interested in bringing that technology to Iraq. 
However, he expressed concern that the technical and legal 
foundations for such a system did not yet exist.  He said one of the 
biggest difficulties is that electronic signatures (including those 
from texts, email, and computer programs), photocopies, and scans 
are not considered legal as evidence to be used in a court of law -- 
thus mobile transactions would be hard to defend in court.  He said 
that before mobile banking could work on a large scale, the COR 
would have to pass a law that specifically made such "documents" 
legal for use in court instead of paper originals.  Eidy also said 
95 percent of the Iraqi population was "electronically illiterate," 
and professed concern they could be taken advantage of without the 
right consumer protections.  (Comment:  The U.S. Treasury Office of 
Technical Assistance (OTA) is advising the CBI on a regulatory 
platform on electronic signatures and other consumer protection 
issues. End comment) 
 
"MOBILE BANKING" vs. "MOBILE WALLET" 
------------------------------------ 
 
¶11. (SBU) The Central Bank makes a distinction between "mobile 
banking" and "mobile wallet" and remains steadfast that only "mobile 
banking" will be allowed in Iraq for the time being.  Mobile banking 
is when all customers have both a cell phone and an established bank 
account in a licensed bank.  The mobile banking interface merely 
allows the customer to access his/her account via the cell phone, 
and all transactions take place through the banking system.  "Mobile 
wallet" (as the term is used by the CBI) is when the phone itself 
can store value and payments can be linked to an individual cell 
phone account.  (For example, in some East Asian countries, one can 
purchase from a vending machine using money stored on the cell 
phone.)  CBI opposes mobile wallet because the cell phone companies 
would act as banks in facilitating transactions and would be more 
difficult to supervise against money laundering and terrorism 
finance.  For the time being, the CBI will require all Iraqis 
wanting mobile banking to first get a bank account that can be 
linked to their cell phone.  (Comment:  Treasury's OTA is 
extensively advising the CBI on bank regulation issues.  The GOI 
will need to carefully weigh the potential economic benefits of a 
more loosely regulated mobile banking sector with the prudential and 
security concerns inherent in a proliferation of non-banks (telecoms 
companies) providing bank-like services. End Comment.) 
 
CBI WANTS NEW NATIONAL SWITCHES 
TO BE LOCATED IN IRAQ 
------------------------------- 
 
¶12. (SBU) For a mobile banking system to work, all participating 
banks must plug into an inter-operable electronic "switch" (a kind 
of sophisticated server) that will clear their transactions in a 
timely manner.  Several different bankcard switches already are in 
operation.  The AMWAL consortium of 13 private banks in Iraq has a 
switch located in Amman, Jordan through which the consortium offers 
Visa, Mastercard, and other electronic banking services.  Warka Bank 
(private), Rafidain (state-owned), Rasheed (state-owned), and the 
Trade Bank of Iraq (state-owned) all have their own switches, too. 
Treasury's OTA is helping the CBI with the new architecture of their 
payments system, which will include a new "national bankcard switch" 
Qpayments system, which will include a new "national bankcard switch" 
and a "national mobile banking switch," that would act as umbrella 
switches over the various other switches, making them 
inter-operable.  The Central Bank will require these switches to be 
physically located in Iraq.  Treasury's OTA indicates that the two 
switches could be up and running within the next year. 
 
STATE BANKS NEED CORE BANKING SYSTEMS 
------------------------------------- 
 
¶13. (SBU) Before the state banks can be involved in mobile banking, 
they all need to install a "core banking system," an integrated 
computer system handling a bank's basic operations, such as 
recording transactions, interest calculations on loans and deposits, 
customer records, payments, and withdrawals.  A core banking system 
allows customers with an account at one branch to access their 
account seamlessly at any other branch of that bank. 
 
¶14. (SBU) Treasury's OTA is helping the state-owned banks 
restructure and modernize.  With OTA's help, Rafidain and Rasheed 
Banks both now have computer systems at their Baghdad headquarters 
and at each branch, but they are not interconnected.  Rafidain is in 
the process of rolling out a core banking system at its headquarters 
and 160 branches, and could be finished within a year.  Once the 
state-banks' systems are up and running, the goal would be to 
connect them to a national bankcard switch.  According to Treasury 
OTA, the state banks could also offer a mobile banking interface. 
 
BAGHDAD 00000518  004 OF 004 
 
 
(Comment:  USF-I, J-6 (Communications and Information Systems 
Directorate) assesses that limited national information 
infrastructure and lack of a terrestrial communications backbone 
will prove a major challenge to this initiative.  However, it 
appears the core banking systems are intended to run through 
satellite links, which may reduce this limitation. End Comment.) 
 
GOI ENTITIES STILL LIMITED 
TO STATE-OWNED BANKS 
-------------------------- 
 
¶15. (SBU) The Ministry of Finance (MOF) has long had a policy 
limiting GOI entities (e.g., ministries, provincial governments, and 
state-owned enterprises) to using state-owned banks, with very few 
exceptions.  The Minister of Finance recently released a letter 
allowing self-funded state-owned enterprises (the ones that do not 
receive any funding from the federal budget) to use private banks as 
soon as the CBI releases relevant guidance.  CBI Director of Banking 
Supervision Walid Eidy told us January 13 that his team was writing 
guidance for the CBI Governor to approve shortly.  (Comment:  During 
the week of February 14, the Council of Ministers reportedly issued 
official "instructions" to all government entities (including 
self-funded SOEs) that they are prohibited from doing any business 
with private banks.  End comment.) 
 
SMART CARD SYSTEM PROBABLY BETTER FOR 
LARGE GOI PAYROLLS IN SHORT TERM 
------------------------------------- 
 
¶16. (SBU) Given that the MOF only allows GOI entities to use 
state-owned banks, and that the state-owned banks are still working 
on their core banking systems (and have still not connected into a 
national switch), it appears unlikely that GOI employees could be 
paid via mobile phone in the short-term, even if "mobile wallet" 
were allowed.  Meanwhile, an electronic payment scheme for GOI 
employee salaries and pensions already exists:  the "Smart Card" 
system through Rafidain and Rasheed Banks.  If the goal of a project 
were to find a way to quickly set up an e-payment scheme directly 
and transparently on a larger scale, the existing "Smart Card" 
system would appear the way to go.  Treasury's OTA provided guidance 
to the GOI's "Smart Card," project, in which over one million 
individuals currently receive their pay electronically on a special 
card.  This system appears to be working well, as many provincial 
governors are eager to have their province join.  The Smart Card 
system itself may develop a mobile phone interface in the next 
couple of years, according to Treasury OTA. 
 
FORD